Capital in the 21st Century: Chapter 1
The first chapter of Piketty’s Capital is entitled “Capital and Income” and appears to serve two primary purposes. It opens by outlining a few of the terms which will be central to the forgoing work (capital, national income, global output, etc. etc.), then shifts to a discussion of the “global distribution of [capital] production,” a discussion which, to be honest, feels rather partial and disjointed. Though, he has promised a further expansion of this section in later portions of the book, so I will limit my discussion of this section of the text to a minimum.
As much as Piketty seeks to divorce himself from the 1968 style anti-capitalism of Europe and the US, his principal dichotomy appears to retrace well worn Marxist ground: that is, the antagonistic distinction between labor and capital. I find his use of this traditional dichotomy noteworthy, as it appears to forgo many of the now classic neoliberal economic suggestions that the category of labor has been largely, if not entirely subsumed under the category of the “consumer.” Piketty appears to here recognize that the labor question–i.e. the relation between labor and capital–far from having been definitively answered by the twentieth century, will continue to be a central, guiding antagonism into the twenty-first century. Piketty appears to take the definition of labor to be relatively self-evident, but spends a great deal of time in the first half of the chapter precisely delimiting his terminology in regard to capital.
Central Terms and Ideas:
National income: rather than relying upon GDP, Piketty primarily uses “national income.” The advantage of this alternate term, Piketty suggests, is that it more fully encapsulates the real wealth of a nation. To calculate “national income,” Piketty first subtracts the “depreciation of capital” (43) from GDP. That is, roughly 10% of GDP which accounts for “wear and tear of buildings, infrastructure, machinery, vehicles, computers, and other items during the year in question” (43). Next, Piketty adds “net income recieved from abroad” (44). That is, simply put, income from foreign investments, minus income paid to that nation (rent, etc.).
Capital: Next, Piketty seeks to define his central term, capital. First, he is clear to exclude “human capital” (education, skills, etc.), and instead states that:
“in this book, capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market. Capital includes all forms of real property (including residential real estate) as well as financial and professional capital (plants, infrastructure, machinery, patents, and so on) used by firms and government agencies” (46).
Second, and this is a noteworthy derivation from Marx’s Capital (which, I should apologize for constantly referencing, but as I said last time, I am reading them simeltaneously, and I can’t avoid the comparisons), Piketty uses “capital” and “wealth” as interchangeable terms. This decision appears well founded. For, while I appreciate Marx’s reservation of wealth as a broader category which includes natural resource, Piketty rightly recognizes that:
“it is not always easy to distinguish the value of buildings from the value of the land on which they are built. An even greater difficulty is that it is very hard to gauge the value of ‘virgin’ land (as humans found it centuries or millenia ago) apart from improvements due to human intervention, such as drainage, irrigation, fertilization, and so on” (47).
Capital/income ratio: This ratio, designated as β, gives the total percent of capital relative to income (generally measured in one year). E.g. “if a country’s total capital stock is equivalent of six years of national income, we write β = 6 (β = 600%)” (50). Said otherwise, β is simply how many years of income are present nationally (or globally) or, to speak much too loosely, it could be thought to roughly describe how many “years of work” are incarnated in capital stock.
First Fundamental Law: α = r x β. That is to say, capital’s share of national income (α), is equal to the average return on capital (r) mulitplied by the capital/income ratio (β). “In other words, if national wealth represents the equivalent of six years of national income, and if the rate of return on capital is 5 percent per year, then capital’s share in national income is 30 percent” (52). This concept is central, as it is precisely this share of national income which Piketty will uncover in the ensuing chapters, and which he will discover to be steadily (even necessarily) increasing (recall, from last night’s post “r > g”).
The Global Distribution of Capital:
As I indicated above, I will avoid going into substantial detail on this half of the chapter, but at least a few of Piketty’s discoveries here are worth noting. Most importantly, Piketty shows that Europe and America’s share of global GDP was dramatically increased by the industrial revolution and colonization, to the point that by 1910 the west controled an astounding 70-80% of world output. Yet, as development has moved to the south and east, this share has dramatically declined to approx. 40%, and it is likely (particularly given India and China’s meteoric economic advances) to continue to decline throughout the approaching decades. This suggests that the great disparity between the “first” and “third” world is presently closing, and that “regardlesss of what measure is used, the world clearly seems to have entered a phase in which rich and poor countries are converging in income” (67).
Nevertheless, Piketty cautions agaisnt an over-eager optimism which might claim that the “free flow of capital” necessarily results in convergence (the globalized version of the Kuznetsian curve) for two reasons. First, “the equalization mechanism does not guarantee global convergence of per capita income. At best it can give rise to convergence of per capita output” (69-70). If I might furnish Piketty’s point with an example, during British colonization, the colonies, e.g. India, saw a dramatic increase in output. Yet, because the income from this increased production was internationally owned (by Britain), India did not recieve a correlated increase in national income (this is an example where Piketty’s preference of national income over GDP is key, as GDP does not distinguish authentic domestic product from product that is generated domestically, but owned internationally). Second, from a historical perspective, “it does not appear that capital mobility has been the primary factor promoting convergence of rich and poor nations” (70). Rather, Piketty insists, it is education–that is to say, the generation of human capital–which has constituted the primary engine of convergence.
Stay tuned for the next chapter, where I will be expounding Piketty’s understanding of “growth.”